Fear of missing out (FOMO) is becoming an increasingly important force behind Wall Street’s latest advance, with options-market indicators showing some of the strongest demand for upside exposure in years as investors rush to participate in a rally that has pushed U.S. stocks to record highs.
Easing tensions in the Middle East, lower oil prices and stronger-than-expected corporate earnings have provided fundamental support for equities. But derivatives markets suggest that positioning and momentum are now playing a larger role, as investors who had remained cautious during the earlier market consolidation scramble to increase their exposure.
“There are several factors, but FOMO is a part of it,” said Mark Hackett, chief market strategist at Nationwide.
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“Most of the core tenets of the bear thesis have broken down, and being short on an absolute or relative basis is a risk that many are unwilling to take,” Hackett said.
The shift has been striking because the S&P 500 spent much of the past three months moving within an unusually narrow range. Before its 5.8% gain over the four sessions through Aug. 4, the benchmark had traded within a 5.7% range for roughly three months, compared with an average rolling three-month range of 12.5% since 2006.
The sudden breakout has created a powerful incentive for investors who had reduced positions or stayed on the sidelines to chase the market higher.
That dynamic became even more pronounced after a sharp sell-off in artificial intelligence stocks in late July. Rather than triggering a prolonged retreat, the decline was followed by a rapid recovery, reinforcing a pattern that has rewarded investors for buying market dips.
Options activity provides some of the clearest evidence of the change in sentiment.
The one-month average daily ratio of S&P 500 call options to put options has climbed to 0.9, one of the most bullish readings in at least four years, according to a Reuters analysis of Trade Alert data. Call options give investors the right to buy an asset at a predetermined price, making heavy call demand an indication of increased appetite for upside exposure.
Short-term call skew, another measure of investor demand for rapid gains in stocks, reached a two-year high last week, according to Susquehanna Financial Group. The measure tracks how much investors are willing to pay for calls relative to downside protection, offering an indication of how aggressively traders are positioning for a sharp move higher.
Market breadth is sending a similar warning.
The Bullish Percent Index, which measures the share of S&P 500 companies displaying bullish technical patterns, moved above 70%, a level that can indicate increasingly overbought conditions, according to Adam Turnquist, chief technical strategist at LPL Financial.
Together, the indicators suggest that the rally is no longer being driven solely by investors gradually increasing allocations based on improving fundamentals. Momentum, positioning and the fear of being left behind are now contributing to the buying pressure.
“FOMO never left. It just wasn’t in the forefront of the market,” said Steve Sosnick, chief strategist at Interactive Brokers.
“There are plenty of institutional investors who are more concerned with missing a rally than they are about the market going down,” Sosnick said.
That dynamic is expected to create a self-reinforcing cycle. As stock prices rise, investors who are underweight equities face increasing pressure to catch up with benchmarks. Buying call options offers one way to gain upside exposure quickly without committing as much capital as an outright stock purchase. If stocks continue rising, those positions can generate additional demand and reinforce the rally.
The behavior is also visible in volatility markets.
Typically, volatility measures such as the Cboe Volatility Index, or VIX, decline when stocks rise because demand for downside protection falls. Recently, however, volatility has at times increased alongside equities.
On Aug. 4, for example, the S&P 500 gained nearly 2%, while the VIX rose by almost one point.
“If you’ve got this strong demand for calls, you can get the VIX increasing when the market is going up,” said Garrett DeSimone, head of quantitative research at OptionMetrics.
The combination of rising stocks, higher volatility and stronger demand for calls is significant because it suggests that investors are not simply becoming more confident about the outlook. Some may be aggressively buying upside exposure because they fear that staying underinvested could prove more costly than taking on additional risk.
“The combo of volatility increasing and call skew also increasing suggests that investors were generally under-exposed and thus at risk of underperforming to the upside, hence the need to aggressively buy upside calls,” said Christopher Jacobson, a strategist at Susquehanna.
That creates an important distinction for investors. Strong call demand can be a sign of confidence, but it can also indicate that positioning has become stretched.
Some market participants therefore view the options signals as a contrarian warning. When investors become heavily concentrated on upside bets, the market can become more vulnerable to a reversal because expectations and positioning have moved ahead of underlying fundamentals.
DeSimone said the strength of the rally could lead investors to conclude that risks previously weighing on stocks have disappeared, when some of the market’s recent gains may instead have been amplified by technical factors in the options market.
The concern becomes relevant after such a rapid move. A 5.8% increase in the S&P 500 in just four sessions represents a significant acceleration after months of unusually limited movement. If economic data or corporate earnings fail to justify the elevated expectations, investors who entered late could become sellers just as quickly as they became buyers.
Still, the bullish case has not disappeared.
Investors continue to point to resilient economic conditions, strong corporate earnings and sustained spending on artificial intelligence infrastructure as fundamental support for U.S. equities. The recent decline in oil prices and reduced geopolitical tensions have also eased some of the inflation and growth risks that had weighed on markets.
“While leverage issues and how much further the market can rally through year-end are open for debate, U.S. fundamentals sit on a very solid base, in our view,” said Anthony Saglimbene, chief market strategist at Ameriprise.
The immediate question for Wall Street is therefore whether the current burst of FOMO is bolstering a fundamentally supported rally or pushing equities into increasingly crowded territory.